New Rules for Commission-Based Employees in California Commence as of January 1, 2013

In 2011, the California Legislature amended the Commission Law (Cal. Lab. Code, section 2751) (the "Commission Law") to apply to all employers who contract with or otherwise engage employees to perform services within the state of California on a commission-basis. The amendment goes into effect on January 1, 2013.

Prior to its amendment in 2011, the California Commission Law only applied to employers who did not have an office in California. In Lett v. Paymentech, Inc., 81 F.Supp.2d 992 (N.D. Cal. 1999), the federal district court declared the law unconstitutional because it applied unequally to and discriminated against out-of-of-state employers in favor of in-state employers in violation of the Commerce Clause and the Equal Protection Clause.

Below is a summary of the Commission Law, as amended, and what you will need to do as an employer to comply on and after January 1, 2013.

Who Is Covered?

The Commission Law applies to all employers who have commission-based employees that render services within the state of California.

The Commission Law is clear that these new requirements apply to employers who hire a new employee or otherwise enter into a commission arrangement with an existing employee after January 1, 2013.

The Commission Law is less clear as to whether the new rules will apply to existing commission-arrangements. Arguably, the new rules encompass commission arrangements that predated January 1, 2013 but are revised in any respect after January 1, 2013, or are for yearly terms and, therefore, must be expressly renewed after January 1, 2013. Accordingly, to be safe, employers may want to apply the new rules to (a) commission arrangements with employees hired on or after January 1, 2013, (b) commission arrangements that are offered for the first time to a current employee after January 1, 2013, (c) commission arrangements with current employees that change in any respect after January 1, 2013 and (d) commission arrangements with current employees that apply on a calendar or fiscal year basis and must be renewed on or after January 1, 2013.

How Are Commissions Defined?

The Commission Law incorporates the definition of "Commission" from Cal. Lab. Code, section 204.1, which states, "Commission wages are compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof."

Short-term productivity bonuses (such as those paid to retail clerks) and bonus and profit sharing plans (unless paid based on a fixed percentage of sales or profits as compensation for work performed) are not considered commissions under the Commission Law.

How Does an Employer Comply With the New Requirements?

An employer with commission-based employees in California must:

1. have the employees sign a contract that describes the method by which commissions will be computed and paid;
2. provide the employees with a copy of the signed agreement; and
3. have the employee sign an acknowledgement that the employee received a copy of the signed agreement.

The Commission Law also provides that if a contract expires but the parties continue to perform under the terms of the contract, the contract’s terms are presumed to remain in full force until a new contract is executed or either party terminates the employment relationship.

What Are The Penalties For Failing To Comply?

The prior version of the Commission Law provided for treble damages as a penalty for non-compliance. The amended version removed that provision but did not add any new penalties for non-compliance. However, as with other California Labor Code provisions, a violation of the Commission Law may be considered an unfair business practice under California law (Cal. Business and Professions Code, section 17200 et. seq.) or could result in liability under the Private Attorneys General Act (Cal. Lab. Code, section 2698 et. seq.). Penalties under these sections include civil penalties, actual damages, and attorneys’ fees and costs to a prevailing employee.

What Do Covered Employers Need To Do By January 1, 2013?

Employers should not rely on a general "commission policy" in a handbook or policy manual or on the intranet. Beginning January 1, 2013, employers with commission-based employees in California must provide those employees with a written commission contract that states:

1. what conditions must be met to earn the commission;
2. how the commission will be calculated;
3. when the commission will be paid; and
4. what happens to unpaid commissions upon termination of employment.

Employers must provide signed copies of the commission contract to the employee and require that the employee sign an acknowledgement that they received a signed copy of the commission contract.